Dismissal of securities violation counts (Corp. Code, §§ 25401, 25540, subd. (b)) proper because promissory note did not qualify as a “security” under the Howey test. Black approached Knarr with a real estate investment opportunity in Idaho. In a promissory note, Knarr agreed to pay Black $124,456 and Black promised a percentage of the profits or a portion of the property and guaranteed Knarr that he could get his money back plus 10% interest at any time. The promissory note was revised a number of times. Black was never able to make the real estate deal happen and he failed to repay Knarr. Black was charged with a number of offenses, including multiple counts of using false statements in the offer or sale of a security (Corp. Code, §§ 25401, 25540, subd. (b)). He filed a Penal Code section 995 motion to dismiss two of the securities counts on the basis that the promissory note was a loan and did not qualify as a “security.” The trial court ultimately agreed and granted the motion. The People appealed. Held: Affirmed. Here, the People argued the promissory note was a security under the test set forth in S.E.C. v. Howey Co. (1946) 328 U.S. 293, 301, which asks “whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” After examining the relevant authorities, the Court of Appeal determined the promissory note was not a security. The promissory note was “an individually negotiated, one-on-one transaction,” which distinguishes it from most securities that are offered widely or traded publicly. Furthermore, the guarantee in the promissory note that Knarr would be repaid from Black’s personal property whether the business prospered or not was a feature that made it more like a loan than a profit sharing arrangement typical of securities.

The full opinion is available on the court’s website here: http://www.courts.ca.gov/opinions/documents/H043360.PDF